Global Energy Transition Is Moving Fast

Oil analysts already integrate “disruptive technology” in the shape of hybrid and all-electric cars in their forecasts of probable decline in the total oil demand of the world's two-largest car fleets - in the EU27 and USA - and lower demand growth going forward for the world's fastest-growing fleets of China, India and smaller emerging economies.

Disruptive energy economics is also at work changing the energy piechart, especially the future role of oil, gas and the renewables. Under increasingly rational outlooks, oil's share in global energy can fall from its present 36% - 37%, to well below 33% by 2020, this forecast decline being set by the IEA and similar energy agencies as only possible by about 2030 or later.

For the US fleet whose total size, currently 200 million may attain almost zero annual growth from 2015, car additions or replacements in the 2017-2020 period could average 44 mpg (5.3 litres/100 kms) compared with 29 mpg today. For the EU27 fleet of 215 million cars already at present close to 6.5 litres/100 kms on average, radical gains in fuel efficiency are unlikely in the short-term to 2020, but average trip lengths and trip numbers-per-year are already in decline. Urban utilization of cars and their replacement by a mix of non-car alternatives is increasingly realistic and probable, with further downward impacts on oil demand.

The current combined total car fleet oil demand of the US and EU27 fleets is about 13.25 Mbd and relative to total OECD consumption of 44.25 Mbd (as of February 2012 using IEA data), these two car fleet's oil demand is about 30% of OECD total demand and about 15% of world total demand. Other road, rail and marine transport oil demand in OECD countries adds at least another 5 Mbd to this 13.25 Mbd total, further raising the role of transportation in OECD countries in world oil demand.

Since its most recent and likely all time peak in 2007 at about 9.2 Mbd, the US car fleet's oil demand has fallen by about 0.6 Mbd. In Europe, car fleet oil demand contraction in the Union since 2006, using Eurostat data, has averaged 2% per year and this rate of contraction can easily grow. The effect of these trends to 2025-2030 may become dramatic: US gasoline and diesel fuel demand could fall to 5 Mbd, and EU27 car fleet fuel demand could fall to 4 Mbd by 2025-2030 even assuming only a "trends continued" forecasting scenario, for a total saving of at least 4.5 Mbd and up to 4.75 Mbd.

Total combined savings, only by the US and EU27 car fleets would exceed Japan's present total oil demand, and would exceed the present total oil production of any OPEC state except Saudi Arabia.

ECONOMIC RUPTURE
As oil supply peaks, this cuts total global supply growth to zero annual growth. Driven by multiple and converging factors global oil demand will also peak. Forecasts of when this will happen are published by the IEA and are usually set at 2017. The role of oil prices in this process is also set by the IEA at prices spiking to the region of $175 - $200 per barrel. This paradigm for oil supply and demand reaching a peak is however unrelated to or disconnected with global oil supply-demand elasticities, notably because oil demand is imagined to be only elastic, and fall, when traded oil prices reach historic peaks: as any European car driver knows, filling station prices averaging about 1.60 euros per litre in April 2012 are equivalent to about $350 per barrel.

The upstream traded price of oil is treated as predominant, that is higher prices only or mostly cut demand, ignoring a host of other energy and non-energy factors driving real energy transition faster than expected and predicted. The model is "crisis-dependent", assuming that inelastic demand hits a global oil supply ceiling, oil prices spike, and demand collapses in an economic catastrophe.

This is rearview history. Using IEA data comparing 1973 with 2009, the OECD group in 1973 depended on oil for 52.6% of its energy. By 2009 this had fallen to 36.3%.

The IEA economic disruption model is therefore "classic and catastrophic", and firstly assumes oil prices can attain and sustain, for a certain period of time, about $175 - $200 per barrel. Experience from 2008, when prices very briefly hit $147 a barrel in Nymex trading, shows otherwise and today we can call it the "pre-2008 model", due to multiple and massive changes taking place in the global energy economy - which include and integrate market, non-market, technology and policy changes, social change, and fundamental economic changes.

Taking only two examples of these many changes, we can question the likelihood of oil prices hitting nearly $200/b in a context where global natural gas prices can only and will only decline to 2020 (the IEA estimate is for a 30% cut), and European energy transition to renewable energy has moved so fast and has already reached such extremes that Germany is forced to give electricity away for free on "green power Sundays".

THE SUBSIDY MAZE
Any economic analysis of global, regional or national energy has to confront the subsidy maze. According to the IEA, state subsidies to fossil fuels attained about $409 bn in 2011, proving for starters that oil prices are not "pure market" and never will be. This distorted pricing and resource allocation, or "market misallocation", also applies on the oil upstream: global major energy companies holding about 75% of global oil production, analyzed by Citibank and Deutsche Bank spent an increasing amount on oil & gas exploration and production (E&P) through 2000-2011 despite ever declining net additional additions to total production capacity.

Spending was estimated as rising from around $150 bn annually in 2000, of which two-thirds was spent on oil E&P, to a peak of more than $450 bn in 2008 of which about three-fifths was spent on oil E&P. Since 2008 this has flattened to around $350 bn (annual rate for 2012 based on Q1), with less than 60% of this spending going to oil E&P. Overall, for 2000-2011 the increase of net oil production capacity from this spending was an annual average of 1.75%. Conversely and only concerning stranded gas and shale gas reserves (reporting of which is complex and difficult to compare with conventional gas and oil), these unconventional gas reserves have risen by hundreds of percent since 2000.

The former 7 Sisters or Oil Majors are now 5 ex-oil majors rapidly shifting to becoming Gas Majors underlining that the writing is on on the wall for oil investing versus gas investing. This is made even more certain because shale gas exploration, and stranded gas exploration can both yield major oil condensate finds, as well as extractible gas resources. The classic economic paradigm for a catastrophic version of "Peak Oil" in 2017, entirely supply side driven, can or may come well before this date simply due to falling oil E&P spending or investment, but unexpectedly fast growth of gas supply and renewable energy supply, and unexpectedly rapid pogress in energy saving and efficiency raising may well remove the economic catastrophe - leaving only the end of oil as global dominant fuel.

Oil price spikes to beyond $150 a barrel are today only possible under intense geopolitical stress (Middle East or Iran war), they are no longer credible as spinoffs from oil demand staying totally inelastic and non-oil energy alternatives being few and far apart, and often expensive. Oil prices by 2017 may more rationally be rangebound in the $50 - $75 per barrel range, in 2012 dollars, which spells serious problems both for the global energy majors, and oil exporter countries.

This price range can be compared with current energy prices in boe terms (barrel oil equivalent) for natural gas and coal. Gas as of early June 2012 in the US is priced at less than $16 per barrel-equivalent, even if Asian and European prices are well above $65 per barrel-equivalent, while global coal prices are around $25 - $30 per barrel-equivalent. For the upstream "fuel" supply to unconventional and new renewables (excluding biofuels), eg. windpower and solar power, this price is $ Zero per barrel-equivalent.

Oil was too expensive, and stayed too expensive.

SIGNALLING THE END OF OIL
The most likely scenario, today, is for the current sell-out on oil markets to bottom, or flatten from about $75/b for WTI with a considerable compression of the Brent-WTI premium.

While the $75/b price level is claimed to be a Saudi Arabian "nice price", by its oil minister, from which oil's share of the energy market will not suffer too much erosion, this hides the fact that producing oil has become high cost, needing price levels around $75/b. When or if oil falls below this price level and stays there, the negative impact on oil E&P will further intensify the wipeout curve for oil, because as noted above, oil prices can only again rapidly grow to uneconomic levels, due to insufficient supply and non-replacement of existing capacity.

Separating the economic recession-effect driving down oil demand, from the price-effect and other factors (like technology change) we find this "surprisingly high" real market price, of close to $75/b, as the minimum needed for oil replacement at rates able to support present rates of world oil demand (89.9 Mbd). Going forward, we can expect this supply renewal factor will also maintain the downward pressure on world oil demand - with or without economic recession.

The period of 2012-2015 is critical for analyzing and predicting the coming global energy mega shift.

Economic change towards resource-lean, resource-conserving economic models and paradigms was already a policy poster child, often muddled and bundled together with heroic myths like the "fight" against global warming, but the present OECD-wide recession and economic slowdown makes for radical changes when the end of the tunnel is reached. Energy saving and efficiency raising are themselves maturing as a technology-economy-policy mix, and will become even more acute when "free power Sundays" as in Germany, today, become more widespread due to spiralling growth of wind and solar power. In this new real world, filling station oil prices at the April 2012 EU27 average of about $350 per barrel are an anachronism.

These energy prices cannot coexist together - and oil will be the big loser. The energy major corporations, and oil exporter states will at some near-time stage start to show signs they understand this, and will unveil their strategic responses to this endgame. At this time, as shown by Saudi oil minister Al-Naimi's repeated calls for prices to fall to around $75/b, the oil corporate and producer country thinking is that "moderate prices" can save oil's role in the global energy economy and slow its rate of decline.

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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